Tuesday, October 30, 2001

Frank Conte, Director

Local governments should pause before rolling out publicly-financed broadband services

Municipalities should think twice before entering the cable TV/Internet business. This is the conclusion of a new study released today by the Beacon Hill Institute at Suffolk University. The study, entitled Cashing in on Cable: Warning Flags for Local Government, identifies some of the political and financials pitfalls that threaten municipalities contemplating entry into the cable TV/Internet business.

Explaining the purpose of the study, David G. Tuerck, BHI executive director, said that the cable TV/Internet business is especially alluring to municipalities like the Massachusetts towns of Norwood and Braintree. These towns have an existing electric power business and believe they can compete effectively with the incumbent private-sector cable TV/Internet provider. The problem is that, given the highly competitive, technically changing nature of the telecommunications industry, entry into the cable TV/Internet business poses risks for any entrant, public or private. “As our study points out,” said Tuerck, “the rough-and-tumble cable business is not something for which the average town hall is well suited.”

The study points out five major pitfalls:

1. Evidence of municipalities that have tried but failed. The study reviews the case history of five communities from around the country that have lost money and/or threatened to increase rates or local taxes.

2. Failure to assess adequately the risks of failure. Norwood is prepared to enter the cable TV/Internet business on the strength of financial data that purportedly show an expected profit. A close examination of these data, however, shows that the venture could well prove to be a money-loser for Norwood.

3. The risk that electric ratepayers will be called upon to subsidize the cable TV/Internet business. Last year, Braintree transferred $2.2 million from its electric department to its cable business. Cross-subsidization of this kind penalizes electric ratepayers and exaggerates the profitability of the cable business.

4. The risk that the cable TV/Internet business will drain funds from other municipal needs. As its cable TV/Internet business seeks $1.5 million in new funding, Braintree finds itself increasingly unable to fund urgent school, sewer and building renovation projects.

5. The possibility that income received by a cable TV/Internet business may be taxable, even when earned by a public entity. The IRS might deem such income as subject to the Unrelated Business Income Tax. Municipalities entering the cable TV/Internet business may also jeopardize the tax-exempt status of their electric power operations.

The study concludes with a consideration of a number of related concerns that arise in connection with the entry by a municipality into the cable TV/Internet business. Once it gets into the cable TV/Internet business, a municipality is unlikely to get out, even if it is losing money. Instead, it is likely to raise rates, divert revenue from its electric power business (if it has one), raise taxes, and even try to limit competition from other providers.

Telecommunications is becoming increasingly competitive, with the creation of new technologies, corporate mergers, and a softening economy. Municipalities should assess the risks carefully before they take on such an uncertain venture.

The study, Cashing in on Cable: Warning Flags for Local Government is available in PDF format (requires Adobe Acrobat). A second file including tables is also available.


Posted: 10/30/01

HTML format revised on 02-Jul-2003 3:10 PM

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